Chapter 3 accounting

Prepaid expenses should be ______ by the cost of the asset used during the accounting period. increased decreased unaffected

decreased

A classified balance sheet ______. a. shows changes in assets, liabilities, revenues and expenses b. shows only current assets and current liabilities c. contains confidential information d. groups asset and liabilities into current and long-term categories

groups asset and liabilities into current and long-term categories

Revenues and expenses are reported in the: a. statement of cash flows b. stockholders' equity statement c. balance sheet d. income statement

income statement

Revenues and expenses are reported in the: balance sheet statement of cash flows income statement stockholders' equity statement

income statement

______ is defined as the "cost of borrowing money." (enter one word per blank)

interest

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following? (Select all that apply.) a. cash expense b. liability c. revenue d. prepaid expense

liability prepaid expense

If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and a credit to Sales Revenue, how will this error affect net income for the current period? Net income will be too high in the following period. Net income will not be affected by this error. Net income will be too low. Net income will be too high.

net income will be too high

How do temporary accounts differ from permanent accounts? a. Only permanent accounts are found on the financial statements. b. Only temporary accounts are used in the adjustments at the end of the accounting period. c. Only permanent accounts are transferred to Retained Earnings during the closing process. d. Only temporary accounts are cleared out at the end of the accounting period.

only temporary accounts are cleared out by the end of the accounting period

The two major categories reported in the income statement are: (Select all that apply) revenue expense assets equity

revenue expense

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies: on hand at the end of the accounting period purchased, but not yet paid for, at the end of the accounting period used during the accounting period purchased during the accounting period

used during the accounting period

ABC, Inc.'s income statement shows Service revenue of $40,000, Wages expense of $25,000, and Net income of $1,000. The other expenses on ABC's income statement must equal ______. $16,000 $14,000 $66,000 $15,000

$14,000

Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31? (Select all that apply.) A. A company pays a 6-month insurance premium at the beginning of October. b. A company pays a utility bill for charges incurred in the previous month. c. A company records interest expense that has accrued, but will not be paid until next year. A company pays for 4 months of advertising in the Wall Street Journal on November 1.

A company pays a 6-month insurance premium at the beginning of October A company pays for 4 months of advertising in the Wall Street Journal on November 1.

The entry to close the expense accounts includes: a. A debit to Retained Earnings. b. A debit to all expense accounts and a credit to Retained Earnings. c. A debit to all expense accounts. d. A credit to Retained Earnings.

A debit to Retained Earnings

The adjusting entry for an accrued revenue always includes: (Select all that apply.) Multiple select question. a credit to a liability account a debit to a revenue account a debit to a liability account a credit to a revenue account a debit to an asset account a credit to an asset account

A debit to an asset account A credit to a revenue account

The entry to close the expense accounts includes: a. A debit to Retained Earnings. b. A debit to all expense accounts. c. A debit to all expense accounts and a credit to Retained Earnings. d. A credit to Retained Earnings.

A debit to retained earnings

____ occur when the cash flow occurs after either the expense is incurred or the revenue is earned.

Accruals

Recording salaries owed to employees that will not be paid by the company until the following accounting period is an example of a(n): a. Prepaid expense. b. Accrued revenue. c. Accrued expense. d. Unearned revenue.

Accrued expense

How do adjusting entries for accrued expenses affect liabilities and expenses? Adjusting entries for accrued expenses can decrease liabilities and decrease expenses. Adjusting entries for accrued expenses can decrease liabilities and increase expenses. Adjusting entries for accrued expenses can increase liabilities and increase expenses. Adjusting entries for accrued expenses can increase liabilities and decrease expenses.

Adjusting entries for accrued expenses can increase liabilities and increase expenses.

____ is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used.

Depreciation

The adjusting entry to record interest earned during the period includes a: a. Credit to interest revenue b. Debit to interest expense c. Debit to cash d. Credit to cash

Credit to interest revenue

A company owes employee salaries of $5,000 on December 31 for work completed in the current year, but the company doesn't plan to pay those salaries until the following year. What adjusting entry, if any, is needed on December 31? a. No adjusting entry is needed. b. Debit Salaries Payable for $5,000; Credit Salaries Expense for $5,000. c. Debit Salaries Expense for $5,000; Credit Salaries Payable for $5,000. d. Debit Salaries Payable for $5,000; Credit Cash for $5,000.

Debit Salaries Expense for $5,000; Credit Salaries Payable for $5,000.

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under cash-basis accounting? a. December 10. b. One-half on each date. c. None of the choices are correct. d. December 20.

December 10

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under cash-basis accounting? a. December 20 b. one-half on each date c. none of these choices are correct d. December 10

December 10

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under accrual-basis accounting? a. one-half on each date b. None of the choices are correct. c. December 10. d. December 20.

December 20.

The balance of retained earnings in the adjusted trial balance: a. Equals the balance of retained earnings at the beginning of the accounting period. b. Equals the balance of retained earnings after closing entries. c. Is the amount shown for retained earnings in the balance sheet. d. is not shown

Equals the balance of retained earnings at the beginning of the accounting period.

Which of the following would be referred to as "accruals?" (Select all that apply.) Multiple select question. Expenses incurred, not yet paid Goods and services provided, not yet collected Cash paid prior to expenses being incurred Cash collected prior to goods or services being provided

Goods and services provided, not yet collected Expenses incurred, not yet paid

After the closing entries are posted to the accounts, all temporary accounts: a. Have balances equal to the amounts shown in the unadjusted trial balance. b. Have zero balances. c. Have balances equal to the amounts shown in the adjusted trial balance. d. Are open.

Have zero balances

Which of the following describes the purpose(s) of closing entries? I. Adjust the balances of asset and liability accounts for unrecorded activity during the period. II. Transfer the balances of temporary accounts (revenues, expenses, and dividends) to Retained Earnings. III. Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. a. I only b. II only c. II and III d. III only

II and III

Under cash-basis accounting, companies typically record revenue: a. In the period in which customers order goods and services. b. In the period in which the company receives cash from customers for goods and services. c. In the period in which the company provides goods and services to customers. d. In the period in which goods and services are prepared to be sold to customers.

In the period in which the company receives cash from customers for goods and services.

The revenue recognition principle states that companies typically record revenue: a. In the period in which we provide goods and services to customers. b. In the period in which goods and services are prepared to be sold to customers. c. In the period in which customers order goods and services. d. In the period in which we received cash from customers for goods and services.

In the period in which we provide goods and services to customers.

When should supplies be recorded as an expense? Multiple choice question. In the period cash is paid for the supplies, regardless of when the supplies were received In the period the supplies are purchased, regardless of when cash is paid In the period the supplies are used, regardless of when they were purchased

In the period the supplies are used, regardless of when they were purchased

Under cash-basis accounting, companies typically report expenses: a. In the same period in which an asset is purchased. b. In the same period in which cash is paid. c. In the same period in which a divided is paid. d. In the same period as the revenue they help to generate.

In the same period in which cash is paid.

On January 17, Papa's Pizza signs a contract with Bug Zappers for exterminating services related to a recent sighting of cockroaches in the restaurant. Papa's pays for the extermination service on January 29, and Bug Zappers sprays for bugs on February 7. Using cash-basis accounting, on which date should Papa's Pizza record the extermination expense? a. January 29 (date of cash payment). b. Evenly over the three dates. c. January 17 (date of the contract). d. February 7 (date of extermination service).

January 29 (date of cash payment).

The adjusting entry for a deferred revenue includes a debit to a(n) _____ account and a credit to a(n) ______ account.

Liability revenue

closing entries are: a. Made to transfer the balances of permanent accounts to retained earnings. b. Made to record events that occurred during the period but have not yet been recorded. c. Optional. d. Made to transfer the balances of temporary accounts to retained earnings.

Made to transfer the balances of temporary accounts to retained earnings.

Which of the following pre-payments requires an adjusting entry at the end of the year? a. On December 31, the company pays next year's fire insurance. b. On November 1, the company pays rent for the next six months. c. On December 20, the company pays its liability insurance; coverage starts January 1.

On November 1, the company pays rent for the next six months.

Which of the following is an example of an accrued revenue? a. Prepaying insurance coverage for the next 12 months. b. Providing services to a customer without having yet collected the cash. c. Delaying the payment of interest on an outstanding loan until next year. d. Receiving cash in advance of a service to be provided to a customer.

Providing services to a customer without having yet collected the cash.

Which of the following is not a characteristic of adjusting entries? A. Are recorded at the end of the accounting period. B. Are part of accrual-basis accounting. C. Reduce the balances of revenue, expense, and dividend accounts to zero. D. Allow for proper recognition of revenues and expenses.

Reduce the balances of revenue, expense, and dividend accounts to zero

Which of the following accounts is not listed in a post-closing trial balance? a. Accounts Payable. b. Retained Earnings. c. Prepaid Rent. d. Salaries Expense.

Salaries expense

Which of the following statements regarding the statement of cash flows are correct? a The final financial statement that is typically prepared b. It is an optional financial statement Reports cash disbursements c. The financial statement that is typically prepared first d. reports cash receipts

The final financial statement that is typically prepared Reports cash disbursements reports cash receipes

In a classified balance sheet, liabilities are separated into two categories based on a. The nature of the obligation—determinable amount versus estimated amount. b. The length of time until the obligation is expected to be satisfied—less than one year versus more than one year. c. The amount of the obligation to be satisfied—large versus small. d. To whom the obligation is owed—those inside versus those outside of the company.

The length of time until the obligation is expected to be satisfied—less than one year versus more than one year.

Which of the following describes the information reported in the balance sheet? a. Net income for the period is calculated by subtracting expenses from revenues. b. Total assets equal total liabilities plus stockholders' equity. c. All accounts and account balances are shown and all debits equal all credits. d. Changes in stockholders' equity are shown through changes in common stock and retained earnings.

Total assets equal total liabilities plus stockholders' equity.

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by ______ entries

adjusting

At the beginning of the accounting period, the balances of temporary accounts a. are zero b. depend on whether the company was profitable during the prior period c. reflect the prior period ending balance

are zero

A classified balance sheet shows subtotals for current ______ and current _____.

assets liabilities

The entries that transfer the balances of all temporary accounts to retained earnings are referred to as a. external entries b. adjusting entries c. closing entries d. post-closing entries

closing entries

A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) ______ in the asset account and a(n) ______ in the expense account. a. increase; decrease b. increase; increase c. decrease; decrease d. decrease; increase

decrease; increase

Adjusting entries are made at the _____ of the accounting period, while daily transactions are made throughout the accounting period.

end

If an adjusting entry's credit is to a liability account, then the debit must be to ______. a. revenue b. expense c. prepaid expense d. cash expense

expense

If an adjusting entry's credit is to a liability account, then the debit must be to ______. cash expense prepaid expense revenue expense

expense

Initially a prepayment for items such as rent or insurance are recorded as assets and later are recorded as a(n) ____ in the period the benefit expires.

expense

The primary components of net income are: (Select all that apply) stockholders' equity expenses retained earnings revenues dividends

expenses revenues

True or false: Adjusting entries ensure that assets in the balance sheet are reported at amounts that have been used up or expired during the period.

false Reason: adjustments remove the value of assets that have been used up or expired during the period, leaving a balance that represents the economic benefit remaining in the account.

Consistent with accrual-basis accounting, expenses should be recognized a. when cash is paid by the customer b. in the period when the related revenue is generated c. when a binding agreement is signed

in the period when the related revenue is generated

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following? (Select all that apply.) liability revenue cash expense prepaid expense

liability prepaid expense

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following? (Select all that apply.) revenue cash expense liability prepaid expense

liability prepaid expense

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records Blank______. (Select all that apply.) a. revenues in the period when the revenue is earned, even though the cash has not yet been collected b. revenues in the period when the cash was collected, even if the service was performed in a prior period c. expenses only in the period when cash is paid d. revenues only in the period when cash is collected e. expenses in the period incurred, even though cash has not yet been paid

revenues in the period when the revenue is earned, even though the cash has not yet been collected revenues only in the period when cash is collected

Which of the following line items appear in an income statement? (select all that apply) Supplies Sales Revenue Cash Salaries Expense

sales revenue salaries revenue

After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents: the amount of the sales or services still owed to the customer. the amount of revenues for which goods or services were provided during the current period. the amount of revenues for which goods or services were provided during the current period, but not collected during the period.

the amount of the sales or services still owed to the customer.

The difference between cash-basis and accrual-basis accounting is the ____ of when revenues and expenses are recorded.

timing

Prepaid rent appears in the ______. A. balance sheet because it is an asset B. income statement because it is an expense C. balance sheet because it is a liability D. balance sheet because it is a stockholders' equity account

balance sheet bc it is an asset

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following? Multiple select question. debit to Deferred Revenue debit to Cash credit to Accounts Receivable credit to Deferred Revenue credit to Revenue credit to Cash

debit to deferred revenue credit to revenue

Consistent with accrual-basis accounting, expenses should be recognized a. in the period when the related revenue is generated b. when cash is paid by the customer c. when a binding agreement is signed

in the period when the related revenue is generated

There is a cause-and-effect relationship between revenues and expenses that dictates: a. when revenues are recognized in the income statement. b. the ordering of assets and liabilities in the balance sheet. c. when costs are recognized as expenses in the income statement. d. where in the income statement expenses should be presented.

when costs are recognized as expenses in the income statement.

Which of the following describes the information reported in the statement of cash flows? a. Net cash flows from operating, investing, and financing activities. b. Changes in stockholders' equity through changes in common stock and retained earnings. c. Equality of total assets with total liabilities plus stockholders' equity. d. Net income for the period calculated as revenues minus expenses.

Net cash flows from operating, investing, and financing activities.

Which of the following describes the closing process? a. Record activities that have occurred but that have not been recorded by the end of the accounting period. b. Store all source documents used to record transactions throughout the period. c. Transfer the balances of temporary accounts (revenues, expenses, and dividends) to retained earnings. d. Record external events for the period so that financial statements can be prepared.

Transfer the balances of temporary accounts (revenues, expenses, and dividends) to retained earnings.

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records Blank______. (select all that apply) a. revenues in the period when the cash was collected, even if the service was performed in a prior period b. expenses in the period incurred, even though cash has not yet been paid c. revenues in the period when the revenue is earned, even though the cash has not yet been collected d. expenses only in the period when cash is paid e. Revenues only in the period when cash is collected

expenses in the period incurred, even though cash has not yet been paid revenues in the period when the revenue is earned, even though the cash has not yet been collected

_______ revenue arises when a business receives cash in one period, but does not provide all of the related goods or services until a later period. (Enter only one word.)

Deferred

Which of the following statements best explains the company's profits generated for owners during the period? a. Statement of Cash Flows. b. Statement of Stockholders' Equity. c. Balance Sheet. d. Income Statement.

Income statement

On March 4, Tonkawa Law asks Green Lawn Services for basic lawn maintenance totaling $200. Green Lawn provides maintenance on March 8, and Tonkawa pays for the lawn maintenance on March 12. Under accrual-basis accounting, on which date should Tonkawa record an increase in accounts payable? a. March 8 (date of lawn maintenance service). b. March 12 (date of cash payment). c. None of the choices are correct. d. March 4 (date of request).

March 8 (date of lawn maintenance service).

On May 5, Johnson Plumbing receives a phone call from a customer needing a new water heater and schedules a service visit for May 7. On May 7, Johnson installs the new water heater. The customer pays for services on May 10. Using cash-basis accounting, on which date should Johnson record service revenue? a. May 10 (date of cash receipt). b. Evenly over the three dates. c. May 7 (date of service). d. May 5 (date of phone call).

May 10 (date of cash receipt)

Which of the following describes the information reported in the statement of cash flows? Net cash flows from operating, investing, and financing activities. Changes in stockholders' equity through changes in common stock and retained earnings. Equality of total assets with total liabilities plus stockholders' equity. Net income for the period calculated as revenues minus expenses.

Net cash flows from operating, investing, and financing activities.

On November 15, Meier Company received $3,000 cash from a customer for services that were performed on November 1. On which date should the revenue be recorded under cash-basis accounting? a. November 15. b. One-half on each date. c. None of the choices are correct. d. November 1.

November 15

Which of the following is an example of a prepaid expense? a. Utilities have been incurred but not yet paid. b. Interest is incurred through the passage of time. c. Rent has been purchased in advance. d. Service was provided to a customer but not yet billed.

Rent has been purchased in advance

Which of the following accounts is listed in a post-closing trial balance a. Advertising Expense. b. Service Revenue. c. Dividends. d. Salaries Payable.

Salaries payable

On September 9, Clearmore Services receives a request for services from a customer. The service is scheduled for September 15. On September 15, the service is provided, and the customer pays one week later on September 22. Using accrual-basis accounting, on which date should Clearmore Services record an increase in accounts receivable? a. September 15 (date of service). b. September 9 (date of service request). c. None of the choices are correct. d. September 22 (date of cash receipt).

September 15 (date of service).

In an adjusting entry for expenses incurred but not yet paid ______. a liability is decreasing since cash is being paid for an expense incurred at the time of the adjustment the liability recorded when cash was received is decreasing as the expense is incurred a liability is increasing since cash will be paid in the future due to the expense incurred the liability recorded when cash was received is increasing as the expense is incurred

a liability is increasing since cash will be paid in the future due to the expense incurred

In recording an accrual adjusting entry to account for revenues earned but not yet collected, ______. the asset recorded when cash was paid is decreased as the revenue is earned an asset is increased since cash will be collected at a later date an asset is decreased since cash is being paid at the time of the adjustment the asset recorded when cash was paid is increased as the revenue is earned

an asset is increased since cash will be collected at a later date

Adjusting entries ensure that ___ balances are reported at amounts representing the economic benefits that remain at the end of the period.

asset

Adjusting entries ensure that ______ balances are reported at amounts representing the economic benefits that remain at the end of the period. a. Account b. Asset and liability c. Asset. d. Revenue e. Expense

asset

Prepaid insurance is a(n) Blank______. Multiple choice question. expense in the balance sheet liability in the balance sheet asset in the balance sheet expense in the income statement

asset in the balance sheet

An adjusting entry for accrued expenses involves: (Select all that apply.) a. credit to an expense b. debit to an asset c. debit to a liability d. credit to a liability e. debit to an expense f. credit to a revenue

credit to liability debit to an expense

The process of allocating the cost of an asset to expense over the useful life of the asset is called book value. contra accounting. depreciation. asset valuation.

depreciation

The statement of stockholders' equity includes these amounts: (Select all that apply.) dividends for the period cash ending balance retained earnings total revenues for the period net income

dividends for the period ending balance retained earnings net income

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records Blank______. (Select all that apply.) a. expenses only in the period when cash is paid b. expenses in the period incurred, even though cash has not yet been paid c. revenues only in the period when cash is collected d. revenues in the period when the revenue is earned, even though the cash has not yet been collected e. revenues in the period when the cash was collected, even if the service was performed in a prior period

expenses in the period incurred, even though cash has not yet been paid revenues in the period when the revenue is earned, even though the cash has not yet been collected

An adjusting entry is necessary to record interest expense at year-end because the interest: Multiple choice question. is a material business expense has already been incurred is earned by the company is due at the beginning of the following period

has already been incurred

A primary purpose of adjusting entries is to record events that a. will occur at the beginning of the next period. b. have been recorded incorrectly. c. have occurred but that have not yet been recorded.

have occurred but that have not yet been recorded.

At year-end, companies that utilize accrual-based accounting systems complete the measurement process through the preparation of an unadjusted trial balance recording of adjusting entries posting of non-cash transactions occurring during the year conversion to cash-basis

recording of adjusting entries

temporary permanent

revenues,expenses, dividends assets, liabilities, equity

Which of the following financial statements typically is prepared last? Statement of cash flows Income statement Statement of stockholders' equity Balance sheet

statement of cash flows

Which financial statement would report all of the following information: beginning balances for common stock and retained earnings; current period net income or loss; current period dividends; common stock issued during the year; ending balances of common stock and retained earnings? Comprehensive income statement Income statement Balance sheet Statement of stockholders' equity Retained earnings statement

statement of stockholders' equity

Closing entries move the balances from the ______ accounts into the Retained Earnings account. a. temporary b. permanent c. balance sheet

temporary

The post-closing trial balance helps to verify that: (Select all that apply.) a. the company was profitable during the current period b. we prepared and posted adjusting entries correctly c. the accounts are ready for next period's transactions d. we prepared and posted closing entries correctly

the accounts are ready for next period's transactions we prepared and posted closing entries correctly